Reviewing Changes under the TCJA
Prior to TCJA, US corporations owed tax on their foreign subsidiaries’ profits at the statutory rate (then 35%), but only when subsidiaries returned these profits to the US parent in the form of dividends. Hence most US multinationals kept their profits on the books of their foreign subsidiaries indefinitely to avoid US tax. That was the so-called worldwide system with deferral.
After TCJA, US corporations no longer pay tax on the dividends they receive from their foreign subsidiaries. That is the territorial exemption system. But it is only a hybrid territorial system because, as a partial measure to prevent profit shifting, the TCJA created the so-called Global Intangible Low-Taxed Income (GILTI), which encompasses most foreign income except for “routine profits.” Half of GILTI is subject to tax, effectively setting the tax rate on foreign profits at about 10.5%, half the 21% domestic rate.
The TCJA also created the:
- Base Erosion and Anti-abuse Tax (BEAT) to deter profit shifting from US corporations to their foreign affiliates, and the
- Foreign-Derived Intangible Income (FDII) deduction, a new tax break for export income derived from intangible assets like patents, trademarks and copyrights.
The following table outlines the various characteristics of the GILTI, BEAT and FDII under current law and shows how the No Tax Breaks for Outsourcing Act (sponsored by Sen. Sheldon Whitehouse and Rep. Lloyd Doggett and endorsed by the Americans for Tax Fairness and FACT coalitions), the Biden Plan, and the Wyden plan would modify them.
Comparing New International Tax Plans
|Current Law and Rationale||No Tax Breaks for Outsourcing Act (endorsed by ATF and FACT)||Biden Plan||Wyden Plan|
|GILTI rate||50% of GILTI is exempted from taxation|
(so GILTI is taxed at half the 21% domestic rate)
This rate is too low; it is a giveaway to multinationals’ shareholders
|0% of GILTI is exempted|
(so GILTI is taxed at domestic rate, currently 21%, but ATF wants it to be raised to 28%)
The reduced rate for foreign profits harms workers and domestic businesses
|25% of GILTI is exempted|
so GILTI is taxed at 21% (¾ of Biden proposed 28% domestic corporate rate)
|Options remain on the table: 0% or some percentage of GILTI exempted, depending on where corporate tax rate and other provisions end up to be|
|GILTI exemption for “routine profits” (“Qualified Business Asset Investments” or “QBAI”)||Routine profits are exempted and deemed to be equal to 10% of foreign tangible assets|
The rationale is to target highly mobile intangible profits above the normal returns to tangible capital because intangible profits are more mobile and hence easier to shift to tax havens
|No exemption for routine profits|
The exemption of routine profits creates a perverse incentive to increase foreign investment in tangible assets (i.e., plants) at the expense of domestic investment
|No exemption for routine profits||No exemption for routine profits|
|GILTI blending of foreign tax credit||Global blending (so foreign taxes paid to countries with rates above the GILTI rate compensate lack of taxes paid to tax havens)|
Global blending may be somewhat easier administratively
|Jurisdictional (“per country”) blending (taxes paid to a foreign country is credited against GILTI tax only on income derived from that country)|
Global blending creates a strong incentive to shift profits from countries with rates above the GILTI to tax havens; per-country GILTI eliminates that incentive
|Jurisdictional (“per country”) blending||Either jurisdictional blending|
Or blending in two buckets of countries (those with higher rates and those with lower rates than GILTI)
|GILTI treatment of foreign tax credits||80% of foreign taxes paid are credited against GILTI tax|
This is the one aspect of TCJA that is less favorable to multinationals than NTBOA. The rationale is dubious.
|100% of foreign taxes paid are credited against GILTI tax|
The partial credit creates administrative complexity; giving a full credit for foreign taxes paid is standard and respects other country’s legitimate need for tax revenues
|80% of foreign taxes are credited against GILTI tax||?|
Eliminate the requirement to allocate share of US expenses like management and R&D to foreign income
This rule that pre-existed TCJA means R&D and management functions are not subsidized to benefit foreign income.
|FDII||Reduced tax rate for income (above routine profits) derived from exports|
The FDII is a tax break for US-based exporters of goods and services with high profit margins, which is meant to repatriate intellectual property.
This tax break increases when tangible investment in the United States decreases, which is an incentive to shift jobs offshore.
Tax incentives aiming at intellectual property have a poor record at attracting actual research activities.
FDII is currently under review by the OECD as a harmful tax practice and may violate WTO rules.
|Eliminate FDII but spend as much on new, unspecified tax incentives for R&D||Thoroughly reform FDII by:|
Redefining its base as income equal to a share of R&D expenses for activities carried out in the United States
Equalizing FDII and GILTI rates
|Scope||All US corporations are subject to GILTI and FDII||All US corporations are subject to GILTI||All US corporations are subject to GILTI||All US corporations are subject to GILTI and FDII|
|Oil & gas industry||Oil and gas industries are exempted from GILTI||Eliminates exemption for oil and gas corporations||All tax incentives for oil and gas industry are eliminated||Not addressed|
|Anti-inversion provisions||Weak anti-inversion provision||Corporations effectively managed from the United States or 50% owned by US residents are taxed like US corporations|
A higher GILTI rate increases the incentive to invert, hence the need for stronger anti-inversion rules
|Corporations effectively managed from the United States or 50% owned by pre-inversion shareholders are taxed like US corporations||Not addressed|
|Earnings stripping||No additional provision to counter profit shifting by manipulating interest rates on loans between related subsidiaries|
The GILTI and BEAT are meant to disincentivize all forms of profit shifting
|Limit deduction for interest payments to related parties|
The NTBOA does not touch on the BEAT, but this is an alternative way to reduce one of the main sources of base eroding payments
|Not addressed||Not addressed|
|Current Law and Rationale||FACT / ATF Positions||Biden Plan||Wyden Plan|
|BEAT||Tax on certain base-eroding payments (e.g., interest, royalties) to foreign related corporations.||Same as Biden plan||Replace BEAT with SHIELD, a new anti-base erosion tax modeled after the OECD proposal, which would apply only to base-eroding payments to related entities in countries that are not participating in the global agreement (GloBE).||Keep BEAT but amend it to preserve value of domestic tax credits; if revenue allows, foreign tax credits as well|
|BEAT rate||10% (12.5% in 2026 and beyond)||Same as Biden plan||The rate would be the difference between the taxpayer’s effective tax rate in the payment’s recipient country and the GloBE rate (or the GILTI rate in the absence of a GloBE agreement)||Increase rate on base eroding payments|
|BEAT scope||Only US corporations with annual revenue above $500m are subject to the BEAT||Not addressed||Not addressed||Not addressed|
|BEAT exemption threshold||Only corporations that make more than 3% of their total deductible payments to foreign affiliates are subject to the BEAT||Same as Biden plan||Delete exemption threshold||Not addressed|
BEAT exclusion of Cost of Goods Sold
|Interests and royalties that are reflected in the cost of goods sold are not subject to the BEAT||Same as Biden plan||Include cost of goods sold in SHIELD base||Not addressed|
For easy-to-read blogs on TCJA’s international tax provisions, see:
- Didier Jacobs: https://politicsofpoverty.oxfamamerica.org/us-tax-reform-will-increase-poverty-and-inequality/
- Richard Philips: https://itep.org/post-tcja-international-system-still-leaking-hundreds-of-billions-in-profits/
For further resources on the individual provisions in the TCJA, see the following resources from the Tax Policy Center:
- GILTI: https://www.taxpolicycenter.org/briefing-book/what-global-intangible-low-taxed-income-and-how-it-taxed-under-tcja
- BEAT: https://www.taxpolicycenter.org/briefing-book/what-tcja-base-erosion-and-anti-abuse-tax-and-how-does-it-work#
- FDII: https://www.taxpolicycenter.org/briefing-book/what-foreign-derived-intangible-income-and-how-it-taxed-under-tcja